The Chinese stock market crash came to a juddering halt yesterday, after a nailbiting three weeks that left investors $3tn poorer. The halt came after an escalating series of interventions that culminated in the suspension of trading in more than half the listed companies and strict instructions not to sell that were issued to anyone the government controlled or could influence. It was an extraordinary reaction and left the market with a sense of a drama interrupted, not completed.
As the weekend approached, investors and regulators were taking stock of the damage: the market is still 70% up on a year ago and the sky did not fall in. But international analysts have called the recovery a dead cat bounce – and the leadership’s reputation with its own people for sound management, along with the promise for international investors that the government was on track for overdue economic reforms, has suffered a serious blow.
As the crisis at home escalated, both Li Keqiang, China’s premier, and Xi Jinping, the president and Communist party general secretary, were engaged in a more familiar role: promoting Chinese loans and investment abroad, backed by 30 years of double-digit growth. Li was obliged to take charge of the crisis on 3 July, on his return from a week-long visit to Europe; by the time Xi arrived in Russia for the seventh Brics summit on Thursday, the crash was the talk of the trading floors.
The two Chinese leaders promise their citizens wise stewardship and rising prosperity in return for political quiescence, but suddenly they have the appearance of vulnerability. Official media have resolutely ignored the drama, and the words “panic” and “stock market crash” were scrubbed from the internet. But China’s 90 million small investors have been left bruised by the reversal of a bull market that the government itself engineered 12 months before.
Official pronouncements blamed the public’s “irrational” behaviour. Some media blamed foreigners. In reality, the authorities were paying the price of a year-long rush into the markets that the official media had encouraged with the promise of steadily rising returns – with 20m new accounts opened in the spring. This was an officially inspired bubble – trade rules were relaxed, allowing investors to buy shares with more borrowed money and open multiple accounts – and the burst was overdue.
It has been a traumatic month for China’s small investors, two-thirds of whom, according to a survey last year, have not finished high school. These are largely people who have prospered modestly in the past three decades. Some are retired, others straddle the uncertain worlds of petty trading, agriculture and seasonal migrant labour. Some will still be in credit, but others, especially those who invested in hard-hit ChiNext, China’s equivalent of the Nasdaq, will have lost heavily. Many more have lost confidence.
China can ill afford this market failure. Its stock market has soared and crashed before, but earlier booms were tied to a rising economy. This bubble took place in an economy that is losing steam. China’s miracle years have played out, and the government faces a difficult transition to the higher-value, more efficient and market-oriented economy needed to sustain the next phase of development.
The country’s corporate and local government debt totals an extraordinary 280% of GDP, and has been growing twice as fast as the economy for more than a decade. The property market is depressed and overstocked, and confidence is fragile. China’s future depends on the party’s capacity to make its state capitalist model leaner, greener and more efficient.
The road ahead is fraught with risk. Some challenges are now endemic: a demographic profile, the result of the one-child policy, that gives China the world’s most rapidly ageing population; poor and expensive education; unpaid bills for environmental damage and its health effects; and the prospect of escalating climate impacts that will exacerbate an already acute water crisis and failing crop yields.
China aims to export its over-capacity through grand infrastructure projects around the world, but many of the proposed host countries are vulnerable to political and economic hazards. It is betting on rising domestic consumption, but the consumers are getting old, and their children are a squeezed generation with their own expenses to meet. It is betting on innovation, in a system that does not support small risk-takers or the free exchange of ideas. And it is betting on the internationalisation of its currency, the renminbi, and the opening of China’s financial systems to global markets – but international investors and regulators may well be more cautious than a month ago.
The immediate repercussions of the crash, in a week when Europe is preoccupied with Greece, have largely played out inside China. But in a world that has come to rely on China to keep the global economy ticking over, China’s risk is now everybody’s risk.
The current regime has turned its back on political reform, tightening internal security and promoting a new insistence on socialist dogma. Ironically, China’s success will hinge on how well it can play the next round of the capitalist game. After this week, the odds may have to be adjusted.